Are We Entering a Recession?

Well, it seems like the economic news continues to get worse and worse. While some thought inflation might be slowing down over the past few months, the Bureau of Labor Statistics just released new CPI data showing that inflation rose 8.6% over the last 12 months. The highest increase since 1981.

Oil prices are up 106% over the past year and the nationwide average gas price has hit $5 per gallon for the first time ever.

To try and stop the pace of inflation, the Federal Reserve (affectionately referred to as the Fed) has hiked interest rates propelling the 30-year mortgage rate to a high of 5.85%. With mortgage rates increasing over 2 full percentage points since the start of the year, and home prices up more than 20% from a year ago, mortgage applications in May hit the lowest levels in 22 years.

Not to mention that the stock market isn’t helping calm any fears. Around 40% of stocks in the Nasdaq are down 50% or worse from their highs and nearly 1 in 5 stocks is down 80% or worse.

My Twitter feed is as pessimistic as I’ve seen since the start of the pandemic. I’m seeing tweets like this:

The Kobeissi Letter @KobeissiLetter

Current situation: 1. Mortgage demand lowest since 2001 2. Consumer confidence at all time low 3. Credit card debt up 20% in April alone 4. Inflation of 8.6% highest since 1981 5. Average gas price above $5.00 6. 70%+ of tech in bear market Recession is an understatement.

And this:

HOZ @MFHoz

In a couple of months, the stock market will crash and as a result the economy will crater and fall into severe recession, accompanied with massive layoffs. People will lose their homes and poverty will rise to levels last seen in the Great Depression.

And even this gem from renowned doomsayer and author of the popular personal finance book Rich Dad, Poor Dad:

therealkiyosaki @theRealKiyosaki

Best INVESTMENT: Cans of Tuna Fish. Inflation about to take off. Best investments are cans of tuna & baked beans. You can’t eat gold, silver, or Bitcoin. You can eat cans of tuna and baked beans. Food most important. Starvation next problem. Invest in the solution. Take care.

Yet, amidst some of these distressing statistics, there are also some promising ones. Job growth continues to be incredible, credit quality is improving, and consumers are still spending healthily which is the opposite of what happens during a recession.

There are still over 11 million jobs available and less than 6 million people who are unemployed.

Despite much of social media being doom and gloom about the economy, there are plenty of smart people who aren’t convinced a recession is imminent. Neil Dutta, an economist who analyzes global market trends for institutions, was recently asked in an interview if he thinks a recession is coming:

“In a word, no.

I can see why investors are anxious. But the economy is more about doing things for people, services in other words. And, that part of the economy appears to be booming. People are conflating a normalization of consumption behavior with a recession.

As an example, search interest on Kayak has exploded as we have been pointing out. People are increasingly searching for foreign routes. That does not strike me as recession-like behavior since flying abroad is usually more expensive than flying domestic. 

Hotel occupancy rates continue to climb. Dining out has recovered.

Did you take your son to see Sonic 2? I did and Alamo was packed for a B-rated movie starring Jim Carrey.”

The current economic environment is leaving a lot of people confused with these contradictory indicators.

Regardless of whether you think we’re already in a recession, or a recession is definitely on the horizon, or even if you’re not so sure we’re headed in that direction, here is my advice on how to prepare your finances for one.

Give yourself a margin of safety with a high savings rate and an emergency fund. Pay your bills on time and keep a good credit score. Be diversified with your investments and don’t put all of your eggs into one basket. Don’t take on too much debt. Avoid lifestyle creep by keeping your personal spending in check.

The thing is, you should be doing these things regularly anyway, not just when you think there could be a recession coming.

Regardless of if or when a nationwide recession could hit, you could easily have your own personal recession at any time—even when the overall economy is strong. Maybe you lose your job. Maybe your local economy will start to struggle. Maybe you’ll get divorced. Maybe you incur a large unexpected expense. Or you could simply make a poor financial decision that costs you a lot of money.

The point is you don’t prepare for a recession by figuring out the exact start and end dates of the next slowdown in the economy. You prepare by building a financial plan that can survive a wide range of outcomes. You should always keep your financial situation prepared for any curveball life will inevitably throw at you.

Recessions aren’t great because people lose their jobs, businesses go under, and people lose money. But remember that economic contractions are a feature, not a bug of the system in which we all participate.

If we do end up experiencing a recession like everyone seems to think we will, I’ll remind you of one of my favorite quotes from Michael Batnick:

“Good things tend to happen when everyone is expecting the worst.”

Recessions don’t always have to mean the world is coming to an end. In fact, I can’t remember the last time that happened.

Thanks for reading!